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Water Over the Dam | Will Investors Take the Plunge?

eletrobrasADR

Source: Brasil Econômico | 24 January 2013
Tenor: Market is moderately cautious over energy-sector pricing reform
Excerpt | Translation: C. Brayton

Negative pressure on shares is transitory and reflects the continued uncertainty of investors. The BM&F Bovespa’s electricity and energy sector index (IEE) is down 1%.

The reduction in energy bills announced by the president on January 23 has had a limited negative impact on the shares of electricity generators, transmitters and distributors.

Pedro Galdi,chief analyst at the SLW Corretora brokerage house, explains that the government has already absorbed part of the losses suffered by some companies. 

“The government must balance its books in order to finance the costs of these companies as much as possible, because the sector comprises a number of different segments with growing costs. Investors find themselves a little lost, not knowing what firms might be penalized in the process. This is why electricity sector stocks have begun falling,” he says.

According to Aneel, the industry regulator, the federal government will have to disburse R$ 8.46 billion in 2013 to underwrite the price cuts. In September 2012, the estimate stood at R$ 3.3 billion.

Savings on energy costs to the residential consumer will reach 18%, and 32% for industrial consumers. Originally, the plan stipulated savings of 16% and 28%, respectively.

According to the industry federation FIESP-CIESP, annual savings will range between R$ 24 billion and R$ 31,5 billion. “This is an important step in the direction of recovering Brazil’s lost competitive capacity,” the industrial foundations said.

“Reducing the cost of electricity reducing the cost of production as well, and the billions of reais saved will jump start the economy. The program benefits all sectors of the Brazilian economy and has a direct influence on the pocketbook of the average Brazilian,” said Paulo Skaf, Fiesp president, in a press release.

Classification agency Fitch reports that distributors such as Eletrobras will be the hardest hit.

The Brazilian federal government owns 52% of Eletrobras, and Eletrobras controls at least 15 subidiaries — among them the 50% stake in Itaipú Internacional.

That being said, Fisk predicts that the company’s current ratings will not suffer.

“The rates review is already figured into the calculation of volatility,” said Mauro Storino, a senior director at Fitch. “We expect that industrial concerns will be able to generate their own capital structure for coping with reduced cash flow, despite the doubts that continue to circulate and given that a rating agency action is not completely out of the question,” he said.

Pedro Galdi stresses that all these companies will have to reexamine their cost structures as their income falls. “These companies will have to identify and rectify areas in which they are not cost efficient.

Eletrobras, which recently renewed its concessions and promised to deliver power at a lower rate, had assumed the government would subsidize it to the tune of R$ 30 billion, but will actually only receive.R$ 14 billion. They will have to account for this loss in their budget,” says Galdi.

Generally speaking, Brazilian distributors are beneficiaries of the government initiative to lower electricity prices by means of a negociated concession renewal. Even so, these government actions have made the investor nervous.

During yesterday’s trading, the IEE — an index of energy companies — was down 1.17%, weighed down by Eletrobras (ELET3) and the distributor Eletropaulo (ELPL4), which fell 7.53% and 3.81%, respectively.

Two other listed companies, Cesp (CESP6) and Cemig (CMIG4), both of which decided not to accept an early renegotiation of their concessions, essayed a brief uptick before giving into pressure and falling by 0,48% and 0,62%, respectively.

Galdi says these last companies will be obliged to turn their generation plants over to their governments somewhere between 2015 and 2017, which would force the companies to enter another market segment, such as aeolic or thermal generation.